Tagged: nflx

Boxes and Lines

 

In the sense that high-speed transmission lines connecting computerized boxes are the stock market, it’s boxes and lines.

Also, stock exchange IEX, the investors exchange, hosts a podcast called Boxes and Lines that’s moderated by co-founder Ronan Ryan and John “JR” Ramsay, IEX’s chief market policy officer. I joined them for the most recent edition (about 30 mins of jocularity and market structure).

In case you forget, the stock market is not in New York City.  It’s in New Jersey housed in state-of-the-art colocation facilities at Mahwah, Carteret and Secaucus.  It’s bits and bytes, boxes and lines.

It’s superfast.

What’s not is the disclosure standard for institutional investors.  We wrote about the SEC’s sudden, bizarre move to exclude about 90% of them from disclosing holdings.

The current standard, which legitimizes the saying “good enough for government work,” is 45 days after the end of the quarter for everybody managing $100 million or more.

We filed our comment letter Monday.  It’ll post here at some point, where you can see all comments. You can read it here now.  Feel free to plagiarize any or all of it, investors and public companies. Issuers, read our final point about the Australian Standard of beneficial ownership-tracing, and include it with your comments.

Maybe if enough of us do it, the SEC will see its way toward this superior bar.

Without reading the letter or knowing the Australian Standard you can grasp a hyperbolic contradiction. The government’s job is to provide a transparent and fair playing field.  Yet the same SEC regulates the stock market located in New Jersey. Boxes and lines.

FB, AAPL, AMZN, NFLX, GOOG, GOOGL, MSFT, AMD, TSLA and SHOP alone trade over 2.5 MILLION times, over $80 billion worth of stock. Every day.

And the standard for measuring who owns the stock is 45 days past the end of each quarter.  A quarter has about 67 trading days, give or take.  Add another 30 trading days.  Do the math.  That’s 250 million trades, about $7.9 trillion of dollar-flow.  In 10 stocks.

Why should the market function at the speed of light while investors report shareholdings at the speed of smell? Slower, really.

Do we really need to know who owns stocks?  I noted last week here and in our SEC 13F Comment Letter both that online brokerage Robinhood reports what stocks its account holders own in realtime via API.

That’s a communication standard fitted to reality. True, it doesn’t tell us how many shares. But it’s a helluva better standard than 97 days later, four times a year.

Quast, you didn’t answer the question.  Why does anyone need to know who owns shares of which companies? Isn’t everybody entitled to an expectation of privacy?

It’s a public market we’re talking about.  The constituency deserving transparency most is the only other one in the market with large regulatory disclosure requirements: Public companies.

They have a fiduciary responsibility to their owners. The laws require billions of dollars of collective spending by public companies on financial performance and governance.

How incoherent would it be if regulations demand companies disgorge expensive data to unknown holders?

As to retail money, the Securities Act of 1933, the legislative basis for now decades of amendments and regulation, had its genesis in protecting Main Street from fraud and risk.  The principal weapon in that effort has long been transparency.

Now, the good news for both investors and public companies is that you can see what all the money is doing all the time, behaviorally. We’ve offered public companies that capability for 15 years at ModernIR.

Take TSLA, now the world’s most actively traded – we believe – individual stock. SPY trades more but it’s an ETF.  Active money has been selling it.  But shorting is down, Passive Investment is down 21% the past week.  TSLA won’t fall far if Passives stay put.

That’s market structure. It’s the most relevant measurement technique for modern markets. It turns boxes and lines into predictive behavioral signals.

And investors, you can use the same data at Market Structure EDGE to help you make better decisions.

Predictive analytics are superior to peering into the long past to see what people were doing eons ago in market-structure years. Still, that doesn’t mean the SEC should throw out ownership transparency.

Small investors and public companies are the least influential market constituents. Neither group is a lobbying powerhouse like Fast Traders.  That should warrant both higher priority – or at least fair treatment. Not empty boxes and wandering lines.

PS – Speaking of market structure, if you read last week’s edition of the Market Structure Map, we said Industrials would likely be down. They are. And Patterns say there’s more to come. In fact, the market signals coming modest weakness. The Big One is lurking again but it’s not at hand yet.

Lab Knowledge

We are finally watching Breaking Bad five years after the most successful basic cable series in television history ended.

It’s symbolic of the era that we’re viewing it via Netflix. And NFLX Market Structure Sentiment is bottomed, and shorts have covered. We’ll come to market structure in a moment because it intersects with Breaking Bad.

Launched in 2008, Breaking Bad is about high school chemistry teacher Walter White, who turns to cooking methamphetamine to cover medical bills. He becomes Heisenberg, king of blue meth.

I won’t give the story away but what sets Walter White apart from the rest of the meth manufacturers is his knowledge of molecular structure. Let’s call it Lab Knowledge.  With lab knowledge, Walter White concocts a narcotic compound that stuns competitors and the Drug Enforcement Agency alike. He produces it in a vastly superior lab.

In the stock market there’s widespread belief that the recipe for a superior investment compound is the right set of ingredients comprised of financial and operating metrics of businesses.

Same goes for the investor-relations profession, liaison to Wall Street. We’re taught that the key to success is building buyside and sellside relationships around those very same financial and operating metrics.

There’s a recipe. You follow it, and you succeed.

Is anyone paying attention to the laboratory?

The stock market is the lab. Thanks to a total rewriting of the rules of its chemistry, the laboratory has utterly transformed, and the ingredients that underpin the product it churns out now are not the same ones from before.

I don’t mean to toot the ModernIR horn, but we did the one thing nobody else bothered to do.  We inspected the lab.  We studied the compounds it was using to manufacture the products circulating in the market (ETFs, high-speed trading, etc.).

And we saw that stock pickers were failing because they didn’t understand what the lab was producing. It was not that they’d stopped finding the historically correct chemical elements –financial and operating metrics defining great companies of the past.

It’s that these ingredients by themselves can no longer be counted on to create the expected chemical reaction because the laboratory is compounding differently.

And the difference is massive. The lab determines the outcomes. Write that down somewhere. The lab determines the outcomes. Not the ingredients that exist outside it.

So investors and public companies have two choices.  Start a lab that works in the old way.  Or learn how the current lab works. The latter is far easier – especially since ModernIR has done the work. We can spit out every manner of scientific report on the ingredients.

Back to market structure, before NFLX reported results it was 10/10 Overbought, over 60% short and Passive money – the primary chemical compound for investments now – was selling.  The concoction was destined to blow up.

Everyone blamed ingredients like weaker growth and selling by stock pickers, when those components were not part of the recipe creating the explosion in NFLX. Now, NFLX will be a core ETF manufacturing ingredient, and it will rise.

Investors, what’s in your portfolio?  Have you considered the simmering presence of the laboratory in how your holdings are priced?  And public companies, do you have any idea what the recipe is behind your price and volume?

If you want to be in the capital markets, you need lab knowledge. Every day, remind yourself that the ingredients you’re focused on may not be the ones the lab is using – and the lab determines the outcome. The lab manufactures what the market consumes.

One of the things we’ll be talking about at the NIRI Southwest Regional Conference is the laboratory, so sign up and join us Aug 22-24 in Austin.  Hope to see you there!